Model of endogenous growth

Human capital -- activities such as formal education and on-the-job training. This is person-specific; if the person who knows how to multiply dies, that skill is lost from the pool of human capital

An index of the level of the technology

The key in Romer's model is an adequate stock of human capital. He finds that "what is important for growth is integration not into an economy with a large number of people but rather into one with a large amount of human capital" (Romer, 1990, S98). This is important for countries to note, in setting up political and economic agendas. His conclusion is that, to promote growth, countries' economic policies should:

encourage investment in new research, as opposed to encouraging investment in physical capital accumulation.

subsidize the accumulation of total human capital. (Problem with this one is that multi-nationals parachute in, and use the local human resources and human capital, but spirit their capital out of the country into safer tax havens, not investing the money back into the country, as we discussed in the second week. What countries need to do is to build regulatory frameworks to collect "rent" for the building of human capital from the multi-nationals.

In his 1990 paper, he finds two interesting implications.

That open trade may be supportive of growth and technological development. The example he gives is a study on US counties in the early 19th century. The ones which were close to navigable waterways had higher rates of patenting that those which were inland; as water transportation was introduced, the rate of patenting went up.

That therefore, "a less developed economy with a very large population can still benefit from economic integration with the rest of the world" (p. s99). However, the "economy with the larger total stock of human capital will experience faster growth."

Befunde betreffend Wachstum

There are many firms in a market economy.

Discoveries differ from other inputs in the sense that many people can use them at the same time. (Knowledge is a non-rival good -- this means that if you know how to add and I know how to add, we can both add at the same time. A calculator, on the other hand, is a rival good. We can't use the same one at the same time.)

It is possible to replicate physical activities. (Because knowledge is non-rival, many calculators can be made from the one principle of adding machines -- and lots of other electrical engineering, too, but that's another story.)

Technological advance comes from things that people do. (This one sounds funny, but it's based on the fact that things just don't happen because another year has gone by. That's more like the exogenous growth of a tree -- another year, another ring. What Romer is saying here is that technological advances come when people start experimenting or looking for market niches. The IBM Proprinter happened because a firm wanted to get competitive. The IBM happened because they needed another market. The IBM then failed because cheaper clones were developed by asian countries, with the same computing power for significantly cheaper costs.)

Many individuals and firms have market power and earn monopoly rents on discoveries. (This fifth one is the most interesting, and is also the link to Kwan's presentation on Schumpeter, who stressed the fact that monopoly power was a motivating force in the process of innovation. Intellectual property rights somewhat negate point #2, but only where they are in place and enforced.

Gedankenexperiment Expansion

Innovating companies have 3 options:

designing a new good and earning monopoly rents in the world market

copying a good from abroad that is not allowed to enter the domestic market, and earning monopoly rents from the domestic market alone.

copying a good that is already being sold in the domestic market and playing a duopoly game.

A country would want to limit imports of foreign goods because locally produced goods allows them to keep the money from their companies in their country -- not flowing to a foreign country. This can be done through import restrictions & tariffs, or by selectively weaken intellectual property rights so that foreign rights are undermined and domestic rights are preserved (p.989).

However, if the barriers are too high, and new inventions can't cross the national lines, then the incentive to innovate decreases, and worldwide technological progress slows down. Basically, they find that any barriers on trade slows down worldwide technological growth. Also, as they put it, copying is a tax on the revenues that a copy makes, and reduces the amount of human capital that could be used more productively (ie. innovating).

On the other hand, if companies in both countries A and B innovate, there are greater spinoff benefits (knowledge spillovers) for both countries, and greater overall economic development for the global economy.

What countries have to do is find growth through balancing innovation and copying; tariffs and free trade; incentives to R&D and trade barriers to discourage external goods. (And that's what endogenous growth is all about.)

Verbindung soziale Intelligenz

There are some interesting researchers doing work on how to encourage endogenous technological growth. A lot of this work is remarkably post-Fordist in character. I'll just outline one paper for you. It's called "The New Age of Capitalism: Innovation-mediated production" by Richard Florida and Martin Kenney. In this paper, they describe a system of mass production which uses decentralized decision making, and uses the knowledge and intelligence of all employees, making daily learning important.

Florida & Kenney identify 5 major dimensions in innovation-mediated production (note: this is all terribly reminiscent of Jackie's presentation on post-Fordism):

A shift in the main source of value creation from physical skill or manual labour to intellectual capabilities or mental labour

the increasing importance of social or collective intelligence as opposed to individual knowledge and skill

an acceleration of the pace of technological innovation

the increasing importance of continuous improvement at the point of production

the blurring of the lines between the R&D laboratory and the factory.

Basically, what they're describing is the model of production in a post-Fordist era. In order to stay competitive in an era of constant change, companies have to use all the resources available. They describe a steel factory where production time was cut down from 12 days to one hour, and the quality of the steel produced was improved tenfold -- primarily because of a drastic change in production methods, changes in workers' attitudes to work, and a constant improvement policy.

There's also a utopian stream of thought with these new developments. That workers are able to use their minds as well as their brawn is good, but the authors also offer hope for developing countries -- in the model of Romer's work. Because this new model of development gets workers involved in production, increases your human capital, and develops more innovation.

Endogenous growth theory is a "bootstrap" method -- a way for countries to pull themselves into the information economy using their available resources, and not allowing themselves to be exploited by multinational corporations, as globalization is doing now.